The Problem: Cashback creates an opportunity cost for the recipient due to the choices available for how to spend it.
The Solution: Offer gifts instead.
I was recently talking to the owner of an American Express credit card who was totting up how much she needed to spend to get a return flight in business class to the US. I asked her if she would usually fly business class and she said no, but as it was free she’d treat herself.
I then asked her whether, if she had got cashback instead of airmiles, she would have spent the money on a business class flight to the US and she said no.
It is just one example among many of the interesting human psychology of how we value things and it points to a key learning for businesses; don’t offer cashback, offer gifts.
Why offer gifts instead of cashback? Simple, the gifts will be enjoyed far more than cashback because people will be treated to something they wouldn’t normally buy but will enjoy, and they won’t have any guilt or opportunity cost associated with taking the gift that they would have had if they spent money on it.
To show what I mean, consider an example where someone is offered a free spa day (worth £100) or £120 cashback. They could take the cash, buy a spa day and still have £20 leftover, but they are more likely to enjoy being given the spa day instead. Why? Because there is no opportunity cost and guilt associated with the gift that there is with the cash – if a person is given cash they have to choose what to spend it on and may feel they should buy something sensible, or put it into savings. Whatever they do with it, there were multiple other things they could have done, which may lead them to regret their decision.
In contrast, when they are given a spa day there is no opportunity cost, they are just getting a gift that they can enjoy, guilt free; there is no opportunity cost as there was no other option.
So, companies should stop offering cashback and start offering gifts instead. Customers will enjoy and value the gifts a lot more, and companies can save money by giving gifts instead of cash. For example, buying spa days in bulk means they would get a big discount, so they could offer their customers a spa day worth £200 which only cost them £100.
The company saves money and enhances its reputation by offering great gifts, and the customer is very satisfied, offering an interesting win-win for business and customer alike.
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